No TDS on Interest Part Allowed to Be Retained by NBFC on Loans Purchased by SBI Under Direct Assignment Route | ITAT

Case Details: State Bank of India v. DCIT (TDS) - [2024] 163 taxmann.com 266 (Mumbai-Trib.)

Judiciary and Counsel Details

• Om Prakash Kant, Accountant Member & Sandeep Singh Karhail, Judicial Member
• P.J. Pardiwala, Paras Salva, Pratik Poddar & Ms Rajnandini Shukla for the Appellant.
• Dr. Kishore Dhule, R.A. Dhyani & M.K. Singh for the Respondent.

Facts of the Case

The assessee-State Bank of India, a public sector bank, purchased loans from Non-Banking Financial Companies (NBFCs) through the Direct Assignment route. The assessee purchased 90% of the pool of assets at a reduced interest rate. The remaining 10% interest was retained by the NBFCs.

The Assessing Officer (AO) contended that the interest retained by the NBFCs should be considered as the assessee’s income. Thus, the assessee should have deducted tax at source under section 194A.

On appeal, the CIT(A) held that the part interest retained by the NBFCs on the 90% pool purchased by the assessee was for the services rendered by the NBFCs to the assessee. Therefore, the tax must be deducted under sections 194A, 194J or 194H.
The matter was reached before the Mumbai Tribunal.

ITAT Held

The Tribunal held the assessee purchased a part of the loan by making the upfront payment and allowing the originating NBFCs to retain part interest on such loan paid by the borrowers. There was no material available to show that the assessee borrowed any funds or incurred any debt from the NBFCs. Therefore, the part interest allowed to be retained back with the originating NBFC cannot be said to be interest within the meaning of section 2(28A) of the Act. Thus, the assessee was not obligated to deduct tax at source under section 194A.

Further, when a specific tripartite agreement was entered into between the parties, requiring payment of service fees to the NBFC for various services rendered, and the issue was not the determination of the arm’s length price of these service fees, the interest retained by the NBFC in respect of the pool of assets purchased by the assessee could not be considered fees for services rendered by the NBFC. Therefore, the assessee had no liability to deduct TDS under section 194J on such amounts.

Since the NBFC was not acting as an agent of the assessee with respect to loans advanced to borrowers, there was no requirement for the deduction of tax at the source under section 194H.